Shell Suffers New Setback on Alaska Offshore Drilling

Shell suffered a new setback to its plans to drill offshore in the arctic after environmentalists successfully challenged a decision to grant the company air-quality permits.

Shell has invested $3.5 billion in an exploration program in Alaska's Beaufort and Chukchi seas but has yet to drill. The company's plans have been dogged by legal challenges and regulatory obstacles.

Shell had finally overcome all hurdles last spring, until BP's Gulf of Mexico oil well exploded, triggering the worst offshore oil spill in U.S. history. The Obama administration responded by suspending most new offshore drilling, including in the arctic, throwing Shell's exploration program into disarray.

Yet the Anglo-Dutch oil company remains committed to the region, which it believes contains up to 25 billion barrels of oil reserves--most of it in the Chukchi Sea. In 2008, Shell spent $2.1 billion to obtain leases in the Chukchi.

After the moratorium was lifted, Shell scaled back its plans, resubmitting its application to drill in the Beaufort but postponing a plan to enter the more remote Chukchi Sea pending the outcome of various legal challenges. The company was planning to drill an exploratory well in the Beaufort this year. But without clean-air permits it will struggle to meet that deadline.

Shell was issued the air-quality permits by the U.S. Environmental Protection Agency last year, allowing the company to operate the Frontier Discoverer drilling ship and support vessels, such as icebreakers and a supply ship, in the Chukchi and Beaufort seas.

But two conservation groups and a group representing Native American communities in Alaska requested a review, arguing that in granting the permits the EPA had applied outdated nitrogen-dioxide standards.

In a decision filed Dec. 30, the EPA's Environmental Appeals Board agreed with the petitioners, saying the analysis of the impact of the nitrogen-dioxide emissions on people living on Alaska's North Slope had been "limited in scope." It remanded the Beaufort and Chukchi permits.

Shell said the decision was "very disappointing," given the efforts it had made to minimize the impact of air emissions on arctic air quality and North Slope residents. The company said it has consistently met or exceeded requirements for operating in the arctic and retrofitted the Frontier Discoverer with the best available technology for controlling emissions, at a cost of $25 million.